Retirement Analyses May Send Chills Down Your Back

By Carole Fleck, July 17, 2013 03:56 PM

For those of you who are about to retire, brace yourself. New research suggests this just may be the worst time in a generation to exit the workforce.

Why? The Employee Benefit Research Institute blames a prolonged period of low-interest rates, plus declining returns on investments, which can be particularly problematic at the start of retirement.

So acute is the problem that one in four boomers retiring today - folks who under normal circumstances would have adequate retirement income - now risk running out of money in their later years if current economic conditions persists for too long.

Nearly one in 10 workers retiring now are projected to run short of funds if the low yields climate persists for five years. The odds of new retirees depleting their savings goes up to about one in seven if low rates continue for the first 10 years of retirement, according to the EBRI research.

Related: Can you work until you're 70?

A separate analysis published Wednesday by bankrate.com also underscores the impact of the current economic picture on retirement income.

Here's the example they used: A worker who retired in 1980 with $355,000 in a portfolio, with 60 percent stocks and 40 percent bonds, would have received an average annual return of 6.9 percent over 30 years. That person could have withdrawn 4 percent every year and the portfolio would still have grown to $1.3 million by 2010.

No such luck for a retiree in 2013. Using current market yields to estimate future returns, a person retiring today with a similar 60 to 40 portfolio allocation and withdrawal rate would run out of money in 25 years. Those funds could be depleted even faster if inflation and interest rates rise, as they did from the 1960s to the early 1980s.

"It'll cost more to retire," says David Blanchett, head of retirement research for Morningstar Investment Management, which did the analysis for bankrate.com. And "there are certainly more risks facing retirees today than there were for past generations."

Vanishing pensions (which previous generations generally counted on) only worsen the problem. The majority of boomers say they'll rely primarily on 401(k) plans and Social Security for retirement income.

Also, because many of us haven't accumulated enough in retirement savings, financial planners are now calling into question whether the 4 percent annual withdrawal strategy is wise. Some say 2.5 to 3 percent may be a safer bet so we don't risk running out of money later on.

The prospect of retiring with inadequate income is scary, for sure, but there are some steps you can take to boost your bottom line:

Work an extra five years to beef up savings and to possibly earn a bigger Social Security benefit
Take advantage of catch-up contributions to your 401(k) plan
Pay off your mortgage before you retire and/or downsize
Minimize credit card debt
Make a budget if you don't already have one and live within your means

Photo: Fevi in pictures/flickr

Also of Interest